Although the housing sector and the exchange traded funds (ETFs) witnessed a minor setback last week, things are looking better this week as home sales rise to a two-and-a-half year high.

Many have suggested that the drop in housing starts in October was caused by the expiration of the first-time homebuyer tax credit, which was recently extended by policymakers. (How to play the extension). This week, it was announced that home sales rose 10% in October from September, thanks to a rush of buyers looking to take advantage of the credit.

According to James C. Cooper of Business Week, the following reasons are why housing could remain fundamentally sound:

  • Mortgage rates are low and are not expected to rise any time soon, since the Federal Reserve said it would hold rates steady.
  • Housing prices, especially those in the high-end market, are down dramatically, making high-end homes attractive to those who can afford them. (More on other real estate).
  • There has been an improvement in demand for housing.  Current trends suggest that the inventory of new homes is expected to drop below six months by year’s end, bringing supply and demand closer to an equilibrium level, which will ultimately drive prices up.

Although these are all optimistic factors to consider, one must keep in mind that unemployment levels continue to rise and consumers continue to penny-pinch, which could keep the sector down. (Take a look at REITs).

For more stories on real estate, visit our real estate category.

  • iShares Dow Jones U.S. Real Estate (NYSEArca: IYR): up 21% year-to-date

  • SPDR S&P Homebuilders (NYSEArca: XHB): up 23% year-to-date

Kevin Grewal contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.